Daily Market Update – January 14, 2013

It’s hard to believe that a dovish, non-voting member of the FOMC could have said anything that would have sent the market down nearly 200 points. That was the widely blamed reason for yesterday’s market in which there really was no substantive news.

Maybe it was the carryover from the really disappointing Employment Situation numbers.

Maybe it is the really horrible retail sales statistics that makes people wonder why no one is involved in discretionary spending if the economy is improving.

But at least this morning there’s some good news, just as in the past few quarters. That news is that JP Morgan and Wells Fargo are making money and are likely to make even more as interest rates creep higher. Although there were some signs of slowdown, such as decreased mortgage applications, the overall tone was positive and the numbers were higher.

Unfortunately, that news doesn’t necessarily mean anything for the other 498 members of the S&P 500.

I didn’t really have to scour my records to know that yesterday was the slowest trading Monday in a long time. It’s one thing to not make many new purchases when you don’t have too much cash, but it’s entirely different matter when the cash is there and prices are dropping.

That perfectly describes yesterday.

All revved up with no place to go is a frustrating way to spend the day.

In the past year having cash and falling prices has been a perfect formula to pick up some bargains. However, it just didn’t feel that way to me yesterday. Some of the falls in stocks were just too large and represented what appeared to be over-reactions.

Over-reactions are common, especially on momentum stocks. I suppose you can also make a case that so many stocks have risen so much that they are also due for some kind of give back, but yesterday was definitely a case of taking action first and then asking questions later.

Those kind of reactions aren’t very healthy, but more importantly they do give you a glimpse of how your fellow investors might react in the face of truly bad news.

That alone is a good reason to be defensive. Very few market declines are insidious. They tend to be precipitous, but history also shows that sitting on the sidelines in fear of those kinds of drops only means missed opportunities.

The compromise is to not be fully invested when you have doubts, even though that may mean missing some of the party. The upside is that if you are correct and the market does move downward in a decisive fashion, not only do you suffer less, but you’re likely to overcome what you missed by finally deploying sideline cash at bargain levels.

I’ve been in that mindset now for a long time, much longer than I ever believed I could have emotionally sustained, but I don’t feel as if I’ve missed very much.

I am beginning to believe that we’re at a transition phase right now, with more and more emphasis about to be paid to company fundamentals rather than to the Federal Reserve’s intentions.

During the latter, with most everything going higher it was only natural for investors to dump anything that disappointed, perhaps accounting for some very pronounced moves, unlike what had been seen in the past. After all, why hold onto something that’s falling when absolutely everything else is going higher, buoyed by a Federal Reserve stimulated market?

However, with an emphasis on fundamentals and the belief that stocks can go up or down and not just higher, even in a falling market individual stock drops may be less frightening and less severe.

I think that this earnings season may see a moderation to the market and that would be a great environment in which to spend that money on the sidelines.